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Fiscal Cliff: The End Game

(AP Photo/Charles Dharapak)

President Barack Obama makes an opening statement during his news conference yesterday in the East Room of the White House. The president says the economy cannot afford a tax increase on all Americans and is calling on congressional Republicans to support an extension of existing tax rates for households earning $250,000 or less.

President Barack Obama continued to display a new toughness about the debt negotiation at his first post-election press conference yesterday. He confirmed publicly what he has been telling progressive leaders privately. He will not give on the principle that taxes—rates as well as loophole closings—must be raised on people earning over $250,000 a year.

“We should not hold the middle class hostage while we debate tax cuts for the wealthy,” he declared. Obama has also told progressive leaders that he is looking for $600 billion more in other tax increases on the well-to-do, in order to reduce the pressure for spending cuts.

And he is prepared to “go over the cliff” if that’s what it takes to get the Republicans to make concessions. Specifically, he will allow tax cuts on everyone to expire briefly on January 1, if necessary, in order to increase pressure on the GOP to allow tax relief for the bottom 98 percent. This exquisitely boxes in the Republicans tactically and usefully reminds the voters which side the Republican Party is on.

The strategy also does a neat bit of jujitsu with the business executives lobbying for a "grand bargain." Specifically, the president redirects all of that business pressure onto the Republicans to make a deal—one whose details financial elites wish were different—but with elites panicked, a deal on Democratic terms is better than no deal.

The stock market has been dropping steadily for a week, out of concern that a budget agreement might be delayed. The right is now snared in its own monster creation.

What a difference an election makes.

However, despite the president’s elegant move on tax policy, there are two other aspects to deficit and budget politics where his posture is not quite so firm.

One is whether to include Social Security and Medicare reform (by which the right means cuts) in a grand bargain.

This was always a dubious idea, and part of the right’s hidden agenda to mix up current budget politics with long-term issues about social insurance. Yesterday, Obama came closer than ever before to saying that he would not sacrifice Social Security.

This is also good politics and good economics. The idea that business confidence today has anything to do with Social Security’s balances a decade or two into the future is malarkey, and always was. (Fred, Congress has just reduced Social Security’s projected deficit in 2030. Let’s expand that factory. No, not the one in Beijing, the one here. Really?)

In the end, the administration may have to agree to minor trims in Social Security as part of the final deal. It would be better to shore up the system’s long-term finances by getting the economy back to full employment, which will increase payroll tax contributions. But Social Security looks basically safe, thanks to a lot of pressure from the progressive base, especially the labor movement.

The White House, however, has dropped hints that Medicare could come in for cuts, specifically an increase in the eligibility age. This is a really bad idea. The administration has already imagined that it will be able to cut Medicare by nearly a trillion dollars without cutting services, in order to finance Obamacare. Republicans railed against these cuts in the campaign. Any further Medicare cuts are a terrible idea.

Long-term reform of Medicare is necessary and is a daunting project. But it doesn’t belong in this budget deal.

The idea of a Grand Bargain was always a conservative trap for liberals—a way to make the spurious argument that the recovery required budget cuts and a way to blur separate questions that need to be addressed separately.

Obama bought into the mistaken premise that we need $4 trillion in deficit cuts over a decade. But the way to bring down the long-term deficit is to get a strong recovery going. As the Greeks have found, cutting the deficit in a recession only prolongs and deepens the recession—and increases the deficit. That is the true lesson of Greece.

The Congressional Budget Office has calculated that the so-called fiscal cliff will produce $607 billion of budget cuts in a single fiscal year, and that degree of fiscal contraction will push the economy back into recession. But think of how much damage $4 trillion of cuts will do.

I asked a CBO official if the agency had modeled that question. It has not. The CBO assumes that the recovery will simply arrive of its own momentum, based on a “return to trend.” Economies eventually recover.

This is not accurate, and the House Democratic Leadership should make a specific request to the CBO to model how different formulas of total deficit reduction over the next decade will produce a drag on the recovery.

Obama has let it be known that he wants the deficit reduction to be “back-loaded”—little if any in the first year or two, and then a gradual phase-in. That’s better than the reverse. But in the end game, the most important thing for Democrats is not to be locked into any multiyear mandatory cuts.

Barring some kind of multiyear super-deal—that Obama should avoid—the rules of Congress prohibit one Congress from binding another.

If the recovery turns out to be weaker than the austerity lobby imagines it will be based on budget cuts, Obama needs to be free to call for increases in public investments to stimulate job creation. It would be even better if he sent Congress an infrastructure bill right now, if only to pay for the costs of cleaning up after Sandy and preventing future super-storm Sandys.

But he’s now reveling in the joy of discovery that victory brings power, that power exists to be used, and that Republicans are on the wrong side of the electorate. That’s a very good start.

Comments

As many have pointed out--- nothing happens without debt relief, write downs and mark to market Mr. Kuttner (Cf M Hudson, PC Roberts, S Roach among others) ... Otherwise at best we're talking about New Deal 2 ... that took 10 years before employment returned to levels seen in the Twenties ... it also included a world war, harsh austerity ... and eventually debt write downs.

The following animation may help some people who are confused about deficits and the debt. This is a serious cartoon animation that gives some useful information:
http://www.youtube.com/watch?v=Wd4HDautaUw